This is a guest post by Kevin, who writes a get out of debt blog at No Debt Plan. He wants to help you get and stay out of debt. This is the second post in a series on unemployment and your finances.
In my last article I promised to show you why the income you are losing while being unemployed can likely never be recovered.
Here’s the bottom line: every day you are unemployed increases the likelihood that the job you finally do take will need to pay you more than your previous job.
Let’s run through the math with an example, which will make this very clear.
Calculate Your Weekly Gross Pay
Our example candidate is Joe Unemployed. Mr. Unemployed’s primary skill is providing help desk support to end users. He’s the guy you call when your computer at work isn’t working or you can’t get something to print. Joe normally earns $17 per hour.
If Joe works 40 hours per week he earns $680 before taxes, 401k, insurance, etc.
Joe worked for a large bank that was recently shut down by the FDIC. The bank’s assets were purchased by a competitor that promptly laid off the entire IT division. Joe is now unemployed.
He enjoyed his work and wants to get back to it. But Joe is picky. His last employer had a great 401k and even offered stock options (which, by the way, are now worthless. Let’s hope he didn’t put a large chunk of his savings into company stock!) He worked a flexible schedule so he could come in at 9am and stay until 6pm, or come in at 6am and leave at 3pm. Joe really liked that schedule so he could grab a round of golf with his buddies on Friday afternoon.
Joe loved the perks at his last job and he wants to find another ideal situation. He wants everything that he had at his last job, and maybe more. This causes him to turn down a few potential jobs that he gets calls about the week after he gets laid off.
The Cost of One Week of Unemployment
Let’s say I call Joe on his last day of work. I’ve got an opening with a local client and he could start the following Monday. The job is exactly the same as what he was doing at his last job. The commute is the same, but the hours are strictly 8am to 5pm. The pay is also $16 per hour, one dollar less than he earned at his last job.
Joe declines this job because it pays less and the hours aren’t as nice. It just isn’t the job for him. He is confident he will find a perfect fit in the future. (This is a major mistake and I’ll write more on this in my next article.)
Assume Joe doesn’t find work for the week that he could have been working for me. He has cost himself $640 ($16 per hour x 40 hours). I don’t know about you, but to me that is a lot of money.
Here is the key concept: Joe will need to make at least 31 cents more per hour from the offer I gave him to make up for one week of unemployment. He will need to work an entire year at $16.31 to make up for losing one week’s worth of pay at $16 per hour.
Here’s how the math works:
- 1 week of unemployment: $16 x 40 = $640
- The number of work hours in a year = 52 weeks x 40 hours = 2,080
- $640 for the week divided by the number of work hours in the year, 2080 = $0.307 per hour
And that is just for one week of unemployment.
The Cost of Two Weeks of Unemployment
In a good economy this would still be considered a short time to be sitting on the sidelines. A job may have several rounds of interviews, managers can be delayed in making a decision, and overall the process gets dragged out.
In a poor, recessionary economy two weeks flies by.
Let’s now assume that Joe doesn’t find work for two weeks. He misses out on $1,280 in potential income ($640 per week x 2 weeks).
If he were to find a job starting the following week he would need to make $0.62 more per hour than the $16/hour job I offered him. His total compensation is inching closer to his original $17/hour just to break even on being unemployed.
The Cost of One Month of Unemployment
Things are not looking good for Joe Unemployed. He has been out of work for four weeks straight. He isn’t getting many calls from companies. He is starting to get discouraged.
On top of all that Joe needs to now make at least $1.23 more per hour than the original $16 per hour I offered him. At his last job he was earning $17/hour. Now he needs to make $17.23.
This is the danger most people do not see. In a very short period of time the loss of income from being unemployed outweighs the guaranteed drop in income by taking a lesser paying job.
Because Joe definitely knew he would lose $2,080 over an entire year he avoided jobs that paid less than his old job. But what he doesn’t know that he doesn’t have to be unemployed very long to miss out on that entire amount and more.
Other Unemployment Factors to Consider
Of course this is a simplified example. Some other things that might influence Joe’s decision:
- He will draw unemployment benefits. I didn’t get into unemployment benefits because every state is different. If Joe could get $200 per week in unemployment then each week he misses work at $16 hour he will need to make 21 cents more (rather than 31 cents more).
- Was he earning average market pay? If Joe’s skillset typically pays $20 per hour he was being underpaid. It might be worth it to hold out for at least the same pay he was getting, possibly more. But he still needs to be aware of how much each week of sitting at home is costing him in the long run.